Save Article

Starbucks to Pay First Dividend

SEATTLE—
Starbucks Corp.
SBUX 0.70%
announced its first-ever dividend but said the new cash to shareholders wouldn't stop it from plowing resources into areas of future growth.

Before a crowd of nearly 1,200 shareholders, Starbucks founder and Chief Executive Howard Schultz asserted that substantial growth lies ahead for a company that he said controls only 4% of the U.S. coffee market and 1% of the global market.

Mr. Schultz outlined what he called a "radically reframed" growth model for the coffee giant that tries to get more java into customers' hands, no matter what the form, venue or brand name on the beans.

Acknowledging that the past two years have been humbling, Mr. Schultz said Starbucks is now focused on "disciplined, strategic growth" in targeting a larger share of the overall coffee market.

Starbucks's planned payout comes after a retrenchment in which Mr. Schultz said came after the recession revealed that the chain's rampant store-growth had masked flaws and inefficiencies. With the store-growth engine stalled, Starbucks' leaner cost structure unveiled a free-cash flow generator with a deep stockpile of cash, analysts said.

The world's largest coffee chain underwent a painful restructuring during the recession, shutting hundreds of stores, laying off thousands of employees, and cutting costs by using fewer suppliers and reducing waste.

After shaving more than half a billion dollars in corporate costs, Starbucks said it expects in fiscal 2010 to grow by a net of 100 stores in the U.S. and 200 overseas. Of the roughly 16,700 Starbucks stores around the world, about 11,200 operate in the United States.

Starbucks said that it will focus aggressive growth on the Seattle's Best Coffee brand that it bought in 2003. By expanding that chain's base of 560 cafes, along with making Seattle's Best available in Subway and
Burger King
BKC 0.16%
restaurants, Starbucks said that the number of distribution points for the brand will skyrocket by September to 30,000 from 3,000.

Starbucks said it expects sales of its new instant-coffee packet, Via, to continue growing quickly. The introduction of Via last fall helped restore same-store sales growth at Starbucks after several quarters of declines.

Starbucks sees both Via and Seattle's Best as developing into billion-dollar businesses that will complement its stores.

The company has forecast free-cash flow of $1 billion this year. Its new growth model requires less cash to spend on opening new stores, rendering what Matthew DiFrisco, analyst at Oppenheimer & Co., an "asset-light" business that earns money from more profitable, less capital intensive business lines like its consumer products business and licensing.

But sustaining its growth record won't be easy, considering that a share of Starbucks bought for $13 amid its 1992 initial public offering would be worth $820 today.

Ahead of the meeting, the chain announced the issuance of a 10-cent-a-share dividend to be paid April 23 to stockholders of record April 7.

The dividend will cost the company about $75 million for the quarter, a fraction of the $1.5 billion in cash that the coffee chain expects to generate from operations in fiscal 2010.

Starbucks said it expects future quarterly dividends, subject to board approval, to equal between 35% and 40% of net income.

Shares of Starbucks hit a 52-week intraday high of $26 before the meeting, but ended down 12 cents to $25.29 in 4 p.m. trading on the Nasdaq Stock Market.

The company also said Wednesday that its board authorized the repurchase of 15 million shares of Starbucks stock, on top of 6.3 million shares that Starbucks can repurchase under previous board authorizations. Starbucks has about 743 million shares outstanding.

While touting the company's cost reductions, Mr. Schultz spoke with pride about the limits of such cuts. Amid the darkest moments of the recession, he said, an institutional investor called to beseech him to slash the health benefits that Starbucks extends even to its part-time workers. But to widespread applause from shareholders, Mr. Schultz said he advised the investor to consider placing his money elsewhere.

Some antigun activists had predicted a large showing at the annual meeting in protest of a Starbucks policy allowing licensed gun owners to carry weapons inside the coffee chain's stores. But 20 minutes ahead of the meeting, the protest appeared to consist of a single woman standing outside the Seattle Center holding a sign that read, "Make Starbucks Gun Free." But during shareholder questions, at least three people took the microphone to argue that Starbucks should prohibit guns in its stores.